Question

answer with a short essay please. make it as short as possible:

1. how does the Fed's role as lender of last resort lead to the moral hazard problem? what implications does it have for government policy?
2. How does the efficient market hypothesis differ from the structural stagnationist view of asset bubbles?

Answer 1

1. How does the Fed's role as lender of last resort lead to the moral hazard problem? what implications does it have for government policy?

A lender of last resort (FEDERAL RESERVES) is the lender or loan giving to financial institutions or banks, after all other options have run out is the supplier of liquidity to monetary establishments that are encountering money related challenges. In most of the nations, the loan specialist after all other options have run out is the nation's national bank. eg. In US, It is federal Reserve, In India it is Reserve bank of India etc. The obligation of the national bank is to keep bank runs or frenzies from spreading to different banks because of absence of liquidity. In the U.S., the Federal Reserve gives liquidity to influenced banks, whose absence of liquidity is probably going to influence the economy.

The last-resort lending capacity appeared in the late 1800s because of a progression of dread that inundated the financial business. The dread prompted the breakdown of money related establishments, and this prompted the loss of clients' assets saved in the organizations. The capacity expects to secure the contributors by giving brief liquidity to the banks to continue their activities. In spite of the fact that this capacity kept the breakdown of banks previously, faultfinders state that by giving extra liquidity, the Central Bank entices banks to obtain a larger number of dangers than would normally be appropriate.

Rivals of the capacity assert that business banks and other money related establishments are probably going to make unsafe ventures realizing that they will be salvaged in the event that they experience monetary challenges. This was affirmed amid the 2007/2008 monetary emergency when banks put resources into hazardous resources and were later salvaged by the Federal Reserve. Additionally, the International Financial Institution Advisory Commission blamed the International Monetary Fund for rescuing banks in creating nations that were engaged with hazardous ventures. Be that as it may, if the national bank neglects to rescue banks influenced by bank runs, the impacts could surpass the ethical danger. The national bank can force overwhelming punishments on banks that commit deliberate errors and sanction guidelines to manage banks obtaining from the national bank.

2. How does the efficient market hypothesis differ from the structural stagnationist view of asset bubbles?

The effective market theory (EMH) can't clarify monetary air pockets on the grounds that, entirely, the EMH would contend that financial air pockets don't generally exist. The theory's dependence on suspicions about data and estimating are generally inconsistent with the mispricing that drives financial air pockets.

Financial air pockets happen when resource costs ascend far over their actual monetary esteem and afterward fall quickly. The EMH states that benefit costs reflect genuine monetary esteem since data is shared among market members and quickly fused into the stock cost. Under the EMH, there are no different variables basic value changes, for example, mindlessness or social predispositions. Basically, at that point, the market cost is a precise impression of significant worth, and an air pocket is just a prominent change in the basic assumptions regarding a benefit's profits.

For instance, one of the pioneers of EMH, business analyst Eugene Fama, contended that the money related emergency, in which credit markets solidified and resource costs dropped sharply, was a consequence of the beginning of a subsidence as opposed to the burst of a credit bubble. The adjustment in resource costs reflected refreshed data about monetary prospects.

Fama has said that for a rise to exist, it would need to be unsurprising, which would imply that some market members would need to see the mispricing early. He contends that there is no steady method to foresee bubbles. Since air pockets must be distinguished looking back, they can't be said to reflect anything over quick changes in desires dependent on new market data.